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EU Offers Balkan Farmers a Bleak Harvest

Free trade regime may inflict more damage than help on region’s ailing agriculture sector.

ByIWPR

Ali Berisha began to realise he was losing his battle for economic survival three months ago.

For four years, his dairy plant in Keqekolle, eastern Kosovo, had lost money. “If something big doesn't change soon, I will have to close down my factory,” he said then.

“It is bad enough for me but worse for all the farmers round here. They live off milk sales to me and I don’t know what they are going to do if I have to close down. ”

At the end of 2004, Berisha threw in the towel and put his dairy up for sale. For a farmer like him, the fact that he could freely export his goods to the European Union had brought no comfort whatever .

Two years after Brussels removed virtually all customs duties on goods from the western Balkans, total exports from the region have barely increased. Clearly, producers need more than just access to EU markets to succeed.

“The EU can always open doors - the question is whether we can walk through them,” Milan Tadic, a manager of Podravka, Croatia’s leading food processing company, told IWPR.

“We can't compete with European companies that have been in the market for one hundred years. “We need additional support from the EU.”

Many obstacles prevent a gricultural producers in the western Balkans from exporting competitively to EU markets.

Brussels does little to help the agricultural sector in the region restructure itself.

Governments there are also weak, with poorly functioning administrations that cannot support the restructuring process on their own.

On top of this, producers in the western Balkans face barriers relating to sanitary and quality certification, which they must meet before they can export to the EU.

Finally, there is the problem of local business attitudes. Many companies in the Balkans are struggling to adjust to the concept and rules of market competition. In many ways, the socialist era casts a long shadow over entrepreneurs. Businesses lack the means to compete effectively in the EU market but they also often lack the will-power .

In sum, regional producers need more hands-on assistance if they are to compete in Europe. Without a more proactive approach, there is a danger that with the exception of a handful of companies, producers in the western Balkans will lose even their domestic markets to EU agricultural powerhouses.

EUROPE : MANY DEMANDS, LITTLE SUPPORT

The EU has developed a very open trade regime with the western Balkans, which Brussels hails as evidence of the EU’s commitment to the region’s economic development.

With no customs barriers, so the idea in Brussels runs, regional producers will become competitive in the EU market, increasing production for export, creating jobs and stimulating economic growth.

A more cynical view holds that the EU can afford to be generous with its concessions, as imports from the western Balkans are negligible.

“Total exports from the western Balkans to the EU constitute only 0.5 per cent of EU’s imports each year, ” Vanja Kaludjer, an agricultural expert in the Croatian Chamber of Commerce, told IWPR. “The EU gave us access because we make no difference to their market.”

“The EU’s offer to the western Balkans looks good on paper but in practice does not improve the economic situation on the ground,” said Knaus.

“Structural deficiencies cannot be overcome by allowing trade to the EU, simply because the region is not trading much.”

Some EU officials concede that if the western Balkans is to develop a serious export potential, Brussels must offer more than the trade preferences it has introduced so far.

“Exporters have a point,” said Michael Karnitschnig, a European Commission, EC, official.

“It is not sufficient to have access. There is a need for agricultural restructuring and an agricultural development programme to help them face market pressures.”

The constraints and demands set by Brussels are big. On the other hand, the support offered by the EU - to meet its own demands - is limited.

The constraints start with quotas set on the import of key agricultural products, such as wine, fish and veal, all of which negatively effect farmers in the western Balkans.

For example, wine is one of Macedonia’s major exports. Its vineyards produce around 1,5 million hectolitres of wine each year and – according to local experts - have the potential to export around 500,000 hectolitres to the EU.

But the potential has not been realised, thanks to an EU annual quota of 300,000 hectolitres from Macedonia.

Croatia faces a similar problem. Fish is one of the few truly profitable export industries in Croatia. But the quota system has crippled growth. “It is a quota that they [the companies] fill in four months,” said Vanja Kaludjer.

Access to EU markets is important for local producers, as they can get a higher price for their products in Europe than they would get at home. Unlimited access to this market would thus stimulate investment in the sector.

The quota system reduces this potential investment and thereby slows the speed at which the agriculture sector in the region can modernise itself.

Quotas are a disincentive for producers to increase production, as they can only export a limited amount to the EU.

Significantly, the sugar industry has boomed in the western Balkans since Brussels abolished limits on sugar exports to the EU in January 2002.

In Croatia and Serbia, exports have almost tripled since then. Yet, recently the EC recommended that the EU reimpose quotas on sugar imports from the western Balkans.

The commission argued that developing a sugar sector geared entirely towards EU exports was not sustainable in the long term. Businesses were risking their future by relying too much on just one market, they said.

The EC’s Michael Karnitschnig defends the EU’s stance, however, saying the quota system has the region’s interests at heart.

He says quotas provide a guideline for the development of industries, such as the sugar sector in the western Balkans.

“Trade preferences are the first step towards closer integration with the EU,” he told IWPR. “Quotas are there to provide a guide for structural changes.”

Karnitschnig points out that western Balkan states will be subject to quotas from Brussels if and when they join the EU, so they might as well get used to them now.

The problem is that what Europe sees as a “guide for structural changes” contains more sticks than carrots, as far as producers in the western Balkans are concerned.

According to Verena Knaus, “Countries in the EU have quotas imposed on agricultural production but also receive big assistance from the EU budget, whilst the western Balkans countries do not.”

One large carrot that Brussels offered current EU member states was assistance programmes to reform agriculture; these were implemented in the new member states before their EU accession.

Macedonia’s leading wine producer would benefit from such help. Instead, Tikves has experienced trouble in getting credit to upgrade production. Georgi Petrusev, Tikves’s manager, says access to the EU agricultural development programme would massively improve business.

But so far, the EU has not offered western Balkan states access to agricultural development programmes.

Asked why, Karnitschnig said the region’s institutions were too weak to manage them . “If western Balkan countries applied for such programmes, they would not be able to qualify,” he said. “There is need for more institutional reforms.”

Knaus concedes that currently there is little capacity in the region to manage programmes such as SAPARD (Special Accession Programme for Agriculture & Rural Development), a support programme for states waiting to join the EU.

“But simply saying that western Balkan countries cannot manage the funds is a cheap argument,” she added. “Capacity has to be built and both the EU and governments of the region can start working on this now.”

THE SAA: ALL STICK AND NO CARROT?

Croatia and Macedonia, the only two countries in the region to sign Stabilisation and Association Agreements, SAA, have extra worries vis-a-vis the EU.

The SAA is a contract between the EU and each country in the region, regulating the relationship between the two. It consists of trade liberalisation measures and cooperation projects in a range of fields.

Officials in several Macedonian institutions believe Macedonia usually loses out from the agreement.

Stojmirka Tasevska, head of the agriculture sector of the Macedonian Chamber of Commerce, says local producers risk losing both domestic and regional markets, owing to increased competition from EU producers.

“Customers are quickly switching to cheaper and better packaged Spanish tomatoes,” she said, “whilst our producers are still trying to find their feet.”

In Croatia, Vanja Kaludjer echoes this complaint. “Nobody has made a big profit from [trade agreements with] the EU,” he said.

The reason is EU agricultural subsidies. Roughly six times higher in value than their Croatian counterparts, they make it difficult for Croatian producers to compete. Instead, Croat firms find themselves fighting to defend their existing domestic markets.

“The EU gave us preferences when in reality we want their subsidies,” said Kaludjer. “That is the only possible salvation for the agricultural sector in Croatia.”

The EU argues that the economic situation in the region would be even worse without trade preferences from the EU. As for the losers, Karnitschnig says that trade liberalisation “is not a free lunch. There will always be trade victims”.

SANITARY AND QUALITY CONTROLS: A HURDLE TOO FAR?

Last November, one of the most popular shows on Albanian television, Fiks Fare, (“Precisely That”) ran an investigation on the quality of locally bottled water.

The investigation revealed that Albanian companies were filling bottles with tap water and selling them as spring water.

The authors of the show sent unmarked samples of a variety of Albanian bottled waters to the Albanian Institute for Public Health, a local government body tasked with testing and certifying local products.

Of seven samples, only two were deemed drinkable while traces of faeces were found in one.

A sked by the show to comment on these findings, the companies sent back certificates, confirming their water was safe. To complete the circle, it turned out that the same institute that had done the tests for the show had issued these certificates.

The story highlighted two issues with a direct impact on the ability of western Balkans producers to export.

One is the need for high-quality producers who can meet EU standards. The other is the need for credible state institutions, which can issue certificates that EU buyers can trust.

Questionable quality certificates issued by state authorities make business more costly, increasing the risk that buyers will refuse goods upon receipt.

A state that cannot enforce EU quality rules will adversely affect the development of its own agriculture, as Serbia and Montenegro found out over the recent the sugar scandal.

From 2002, when the EU introduced its liberal trade regime for sugar with the western Balkans, Serbian producers abused the rules by buying up sugar from third parties and re-selling it to the EU as Serbian sugar with no customs duty.

The EU realised the fraud and suspended the customs-free regime on sugar exports from Serbia and Montenegro in May 2003. The penalty was extended in February 2004 and only lifted in September 2004.

The negative impact on Serbian farming was enormous, as the farmers found they could not even sell their sugar at home while the penalties were in place; without the EU trade concessions, local purchasers preferred cheaper imported sugar.

While the EU’s prompt reaction to the Serbian fraud might seem to highlight Brussels’ consistent approach, many producers in the western Balkans complain that the EU, in fact, applies its own rules inconsistently.

“When the EU wants a product, it is happy to turn a blind eye,” one government official in a western Balkan state told IWPR, on condition of anonymity.

Wine is often cited as an illustration of this alleged inconsistency. No countries in the western Balkans meet the EU’s strict criteria on packaging and labelling wines, aimed at forcing producers to indicate the exact provenance of the grapes used.

In spite of this, wine is one of the biggest exports to the EU from the region.

Karnitschnig disputes the validity of these complaints, saying the core of the problem often lies with poor quality products.

“The EU has high standards of food quality and it is hard for low-quality products to enter a high-quality market,” he said.

Far from erecting unnecessary barriers on the region’s exports, he adds, “My colleagues in the commission give the western Balkans VIP treatment.”

Owing to what they see as their difficulties in exporting to the EU, the regional market remains crucial to most western Balkan producers. For example, both Croatia and Serbia and Montenegro export around 30 per cent of their agricultural products to neighbouring Bosnia and Herzegovina.

According to Kaludjer, Croatian fruit and vegetable producers would barely survive without the Bosnian market.

Albania has so far been an exception to this pattern. It exports few products – and those, mainly textiles and footwear. But around 90 per cent of these exports go to the EU.

However, this is now starting to change. Albania’s exports to the region tripled in value in the first half of 2004 from 2.6 to 8.3 per cent, due to the implementation of regional free trade agreements, which have diverted trade from the EU to the western Balkans.

Given the difficulty of exporting to the EU, compared to the region, it is not surprising that many businesses are weary of trying.

“Why buy a new car when a second-hand model serves you just as well?” asked Gjergj Filipi, the internal market coordinator in Albania’s ministry of European integration.

THE REGION’S GOVERNMENTS: UNABLE TO ACT ALONE

Government policies towards agriculture are often inadequate, and in some cases are virtually nonexistent.

This is what Macedonia discovered when it applied for EU membership this year and received a questionnaire from the EC containing more than 3,000 queries.

“The questionnaire was an X-ray of our country,” said Finka Serafimova, assistant director of the Macedonian Sector for European Integration, a government department acting under the responsibility of the deputy prime minister

“It helped us realise that we didn’t have an agriculture policy,” said Valentin Nesovki, the sector’s spokesperson. “We have good agricultural products but no policy.”

In Kosovo, the policy vacuum is worse. One wanders from institution to institution, searching for officials with ideas on agricultural production and export. Such information as exists is anecdotal, partial and often incorrect.

Abdullah Nishori, director of the department of Production and Plant Protection in Kosovo’s Ministry of Agriculture, blames Kosovo’s undefined status for most of the farmers’ difficulties .

He adds that Kosovo lacks institutions that can certify the quality of Kosovo products, so producers cannot export.

But this information turned out to be inaccurate. When IWPR spoke to Fadil Musa, director of the Agricultural Institute of Kosovo, he confirmed that the EU has accredited this institute to certify products and is regularly inspected by them.

The situation of agriculture in Kosovo is the worst in the region, but elsewhere it is not much better.

Arnaldo Abruzzini, Secretary General of the Association of European Chambers of Commerce and Industry, Eurochambres, based in Brussels, says local governments have done too little to help farmers.

“The national governments should put more effort into providing timely and useful information on the process of trade liberalisation and into tackling non-tariff barriers,” he said.

He cited a Eurochambres survey of over 2,000 companies in the western Balkans, which found that companies in the region got little assistance from their governments to become players in European markets.

Many local officials tacitly agree with the substance of this observation. Nadica Dzerkovska, head of the EU integration unit in the Macedonian ministry of agriculture, says local companies are often not aware of their export potential and admits the government needs to do more to inform local producers.

But when asked whether her government knew which firms were exporting to the EU and what sectors most needed support, she did not provide an answer.

In Serbia and Montenegro, according to Karnitschnig, investment in agriculture has only been very basic. “It takes years to change the microeconomic structure of the country,” he said.

In Croatia, the government has launched an initiative called Otvorena Vrata (Open Door) to encourage farmers to adjust to greater specialisation in their products.

This takes the form of financial incentives to farmers to increase olive and beef production, for example.

But local producers are unimpressed. Josip Pavic, president of the Croatian agricultural trade union PPDIV, describes Otvorena Vrata as a utopian scheme. “It is removed from Croatia's agricultural reality,” he said. “The reformed part of our agriculture is only the tip of the iceberg – about 60 per cent of our agriculture is not ready for the EU.

“They have introduced fancy policies for the long term, when we don’t know what we will do tomorrow and the day after.”

Zoran Djordjevic, a manager of the Croma Business Academy, in Zagreb, believes one of the key problems is poor communication between governments, the local chambers of commerce and business.

“The [government] programmes are complicated for farmers and the local chambers of commerce fail to provide logistical support so that farmers can benefit from them,” he said.

Elsewhere in the region, businesses often complain that governments do little to stimulate exports.

Lavdosh Ferruni, director of the Albanian Organic Association, an NGO supporting organic farming, argues that even basic government aid would have a big impact on production and the export potential of agriculture in Albania.

“The demand for organic food, both in Albania and the EU, is on the rise,” he said. “It is clear that there is a market for our products.”

Progress is slow, Ferruni notes, due to “lack of recognition of the potential to export and lack of support by the government”.

Asked exactly what support they seek, Ferruni stressed two points, “If the government would organise promotional campaigns and assist us to find buyers, they would help us a great deal.”

LOCAL BUSINESS: RESISTING CHANGE

Not all the problems facing Balkan farmers can be laid at the door of governments. Producers in the region are in part responsible for the sector’s plight.

Many companies seem to be struggling with the concept of market competition and not only lack the means to become more competitive but also lack will power.

Afrim Arzuallxhiu, director of Progres, one of Kosovo’s largest food processing industries, for example, says he is not anxious to find new buyers in the EU, though he has few at present.

His company works at only 50 per cent capacity and his products are both competitive in the EU market and meet its quality standards. Yet, as himself admits, his company has an attitude problem. It is “not aggressive enough in looking for business (in the EU),” he said.

Arzuallxhiu is much more passionate on the topic of protection measures to safeguard domestic industry, complaining that his counterparts in neighbouring countries get more support in this field.

“If the government is going to impose tough rules, they might as well protect us,” he said.

Dragan Busic, owner of the Bilje Borca medical herbs company, says attitudes need to change and business needs a more entrepreneurial spirit - as well as more investment. “People need to change their attitudes about production,” he said.

According to Karnitschnig, insufficient restructuring in the agriculture sector means many Balkan companies simply “produce the wrong thing”.

“Products are low quality and unsophisticated. They are basic goods that have undergone little processing,” he added.

Andrija Pejovic, economic advisor in the Serbian ministry of European integration, says time – and investment – are needed to rectify these complaints. “You cannot jump one day from one point to another – from communism to capitalism,” he said.

Macedonia’s Finka Serafimova says Macedonian producers have not benefited much from the EU preferences because “ Macedonia is still predominantly a producer of primary agricultural products”.

According to the Eurochambres survey, there is insufficient use of modern communication technologies and little training of employees.

The gap in quality and standards between EU and the Balkan businesses is so wide that it often dissuades Balkan producers from even attempting to export to the EU.

Adem Dumishi, whose company Agro-Alba produces flowers in Kosovo, recalls how awestruck his after seeing the high standards in the Netherlands at first hand.

“When I went on a training course on flowers in Holland and saw the conditions they worked in I knew I shouldn't even try to export,” he said. “I can't compete with such efficient production.”

Tikves of Macedonia is one company in the region that has learned to adapt to the EU system. It has exported to the EU for a number of years now and manager Georgi Petrusev says if they want to further penetrate the EU market, they must follow their rules.

“Macedonia is not well known as a wine producer and we have to compete with wines from Chile and other wine producers, so we are investing in product quality and image,” he said.

Petrusev believes that Tikves is one of the few local companies that is not resisting change. “Sooner or later we will have to work by EU rules – for us, it is better if it is sooner,” he added.

Milan Tadic of Croatia’s Podravka says his company has been doing well independently of the EU trade preferences.

The problem is that many smaller companies are struggling to adjust to EU demands. Some, Tadic says, will lose out and others will emerge stronger. “Change is inevitable in the region. With the EU, it will be more orderly,” he said.

But Tadic adds that western Balkan producers will find it hard to survive in the EU market given the current level of EU assistance to the region.

Karnitschnig agrees that more EU assistance is needed and that access to markets alone is not sufficient. He says the Brussels is going to place more stress on agricultural development programme to help farmers face market pressures in its 2007-2013 budget plan for the western Balkans.

“The programmes that will be offered to the western Balkans will be inspired by those used with the new members states in their pre-accession phase,” he added.

The question is whether many of the region’s agricultural producers can wait. “Our fruit and vegetable producers will not survive another five years under the current market conditions,” said Kaludjer.

Croatian producers are probably luckier than most. With EU candidate status, they can look forward to more EU assistance to restructure their agriculture than their neighbours.

For the rest of the region, the wait for greater EU assistance will be long. For many, like Ali Berisha, it will end up coming too late.

Jehona Gjurgjeala graduated from the London School of Economics with a MSc in European Political Economy: Transition. Additional contributions from John Simpson in Belgrade and Arben Salihu; Muhamet Hajrullahu and Zana Limani in Pristina

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